Sterling slips vs dollar; investors focus on vaccines, UK-EU tensions

LONDON: The pound was a touch lower against the dollar and flat against the euro on Friday, with investors still generally bullish but watching out for possible downside risks relating to the UK's COVID-19 vaccine rollout and tensions with the European Union.

Sterling has gained around 1.8% so far this year against the dollar and 4.2% versus the euro. Analysts say the moves in cable are more dollar-driven, while the euro-sterling move is largely due to Britain's success in rolling out COVID-19 vaccines and relief that a last-minute Brexit trade deal was reached at the end of 2020.

The Bank of England kept its interest rates and 895 billion pound bond-buying programme unchanged, as expected. It said that Britain's economic recovery was gathering pace but policymakers were split over the prospects for longer-term improvement.

The pound initially slipped after the BoE meeting, but remained on track for a weekly gain against the euro. It was set for a net weekly loss of around 0.4% against the dollar.

At 1202 GMT on Friday, sterling was at $1.3911, down 0.2% on the day. Versus the euro it was little changed, at 85.57 pence per euro.

Ned Rumpeltin, head of European currency strategy at TD Securities, said that sterling was likely to continue strengthening against the euro due to the UK's relative success in delivering vaccines.

"We would not be surprised to see euro-sterling trend towards the 82, 83 level," he said.

But he also said that the long sterling trade is "a little bit overcrowded", meaning that the currency could be sensitive to negative news relating to the vaccine supply.

Earlier in the week, Britain said that it will see a significant reduction in the amount of COVID-19 vaccine doses available at the end of this month due to a cut in manufacturing supply.

The European Union has threatened to ban exports of COVID-19 vaccines to the UK to safeguard scarce doses for its own citizens.

BofA FX strategists wrote in a note to clients that April is "the most positive cyclical month for the pound" and that they are bullish about the economy reopening.

"The only near-term cloud on the horizon as we see it is developments in the vaccination roll-out process where we keep a watching brief."

UBS strategists said in a note that the euro-sterling pair is probably being prevented from going below 85 by the UK government's cautious pace of reopening the economy and by continued trade frictions with the EU.

The European Parliament abandoned its plan to set a date for voting on the EU-UK trade deal, in protest at what the EU sees as Britain's unlawful changes to Northern Irish Brexit arrangements.